Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon are considering a further substantial cut in corporate tax to lower than 23%, sources inform "Globes." Other tax cuts are not currently on the agenda. The reason for lowering the corporate tax rate is the tax reform being promoted by the Trump administration in the US.
A week ago, Netanyahu said in the Knesset, "We will cut taxes during the present Knesset session according to a plan that the minister of finance and I will devise soon in order to ease the burden on Israelis, entrepreneurs, and business owners, especially owners of small and medium-sized businesses."
Kahlon refrained from responding to Netanyahu's remarks, and has not discussed the matter with professional staff at the Ministry of Finance. He hinted about his intentions, however, at his meeting with US Secretary of the Treasury Steven Mnuchin at the end of last week. After hearing from Mnuchin about the plan to cut the US corporate tax to 20%, he remarked, "We will closely follow the administration's reform. Israel will adapt itself to any corporate tax measure taken by the US."
Ministry of Finance director general Shai Babad, Israel economic attache in Washington Eran Nitzan, and US Ambassador to Israel David Friedman also attended the meeting on Friday in the David Citadel Hotel in Jerusalem. Corporate tax in Israel is scheduled to fall 1% to 23% on January 1, 2018, regardless of the current plan - the second installment, following a 1% corporate tax cut to 24% on January 1, 2017.
The previous tax cut, which was part of the 2017-2018 budget, was portrayed by Ministry of Finance budget department as a measure designed to encourage economic growth, following "weak growth figures over the past year and growing global competition to attract foreign companies."
In presenting the plan, the Ministry of Finance said that each 1% cut from corporate tax reduced state tax revenues by NIS 900 million. Lowering the corporate tax rate to 23% in effect brings the situation back to what prevailed before the Trajtenberg committee. This committee, founded in response to the social protest, cited the cut in direct taxes and the increase in indirect taxes as an important reason for the increase in the cost of living and the growth in inequality in Israel.
In line with the committee's recommendation, the government decided to rescind the corporate tax cuts planned from 2009, which were to have gradually reduce the rate to 18% in 2016; instead, the rate was raised back up to 25%. Netanyahu and Kahlon already cut the rate from 26.5% to 25% in September 2015, and then decided on a further cut from 25% to 23% in 2017-2018. In addition, two special tax cuts were inserted into the current budget at Kahlon's initiative: one for high-tech companies, which are to be taxed at a reduced 6% rate and 4% on dividends, and a lowering of the tax bracket for exporters operating in outlying areas (development area A), who are entitled to benefits under the Law for the Encouragement of Capital Investments: a cut from 9% to 7.5%. The Manufacturers Association of Israel is seeking further tax cuts under the Law for the Encouragement of Capital Investments in the framework of the government's program of assistance for industry.
Large tax revenue surpluses in 2017
At the beginning of today's cabinet meeting, Netanyahu said that the decision about the use of the multi-billion shekel surpluses in the 2017 budget (higher than forecast revenues) would be taken only at the end of the year. As revealed by "Globes," the surplus in tax revenues this year is already nearing NIS 16 billion, mostly as a result of the lower tax rate granted for personal service corporations. If no decision is made about the use of the money, it will be used to pay for the budget deficit. In his remarks today, Netanyahu said, "2017 will probably be a very successful year for the state coffers, with more revenues than expected. Our big challenge is to continue managing Israel's economy responsibly and cautiously in order to continue prosperity, while allowing all sectors to share in it."
At the end of a long cabinet discussion, the cabinet today approved Kahlon's proposal to establish a budget framework for the next three years, and to release the 2017 budget reserve. "Growth is trickling down, and the lower income deciles are benefiting from prosperity more than the higher ones," Kahlon said at the cabinet meeting.
As part of the discussion, NIS 3.5 billion in reserves designed as a protective mechanism demanded by Kahlon in the framework of the two-year budget were released. The cabinet will discuss how this reserve is to be used in the coming weeks.
Among other things, the ministers were shown macroeconomic data for the Israeli economy. Ministry of Finance officials told the ministers that the Israeli economy was showing strong data. The economy is at full employment, unemployment is at an unprecedented low, and the lower income deciles are benefiting more from growth than the upper income deciles.
Published by Globes [online], Israel Business News - www.globes-online.com - on October 29, 2017
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